Lessons of a For-Profit College Collapse

For-profit colleges are lobbying hard to weaken rules proposed by the Obama administration that would deny federal aid to career training programs that burden students with crippling debt and worthless credentials. But a recent spate of state and federal investigations into potentially predatory behavior by the for-profit sector — combined with the collapse of Corinthian Colleges, one of the country’s largest operators of for-profit colleges and trade schools — makes clear that the rules need to be strengthened and that federal oversight generally needs to be broadened.

That’s the only way to shield students and taxpayers from exploitive or irresponsibly managed for-profit institutions that rely on federal student aid for up to 90 percent of their revenue.

Corinthian, which is being investigated by federal regulators and by several states, has finally come to a kind of reckoning. It has reached an agreement with the Department of Education to shut down or sell about 100 campuses during the coming months.

The department, which began investigating the company in January, will appoint an independent monitor to oversee Corinthian’s operations and look after the interests of its 72,000 students and 12,000 employees during the process of winding down. By taking the gradual approach, the federal government avoided an instant shutdown, which would have been bad for students and workers involved.

According to federal officials, the company refused to turn over data that would have allowed it to determine how well students were succeeding and actually admitted to falsifying job placement and or grade and attendance records at various locations.

These problems are not unknown. Last year, the California attorney general, Kamala Harris, sued Corinthian, charging that it had lied to students and investors about job placement rates for its graduates. The company advertised job placement rates as high as 100 percent for certain programs, when, in some cases, there was no evidence that even a single student had secured a job within the prescribed period of time, according to the lawsuit, which is still pending. Furthermore, it charged that Corinthian deliberately singled out low-income single parents who lived near the poverty line, urging recruiters to focus on “isolated” people who had “low self-esteem.” It also asserted that the company advertised programs that it did not offer.

In June, federal officials put Corinthian on a 21-day delay for receiving federal aid; the chain then warned that it might have to shut down because it could not sustain even a temporary cutoff of government cash. This points out one big problem with how these schools operate: the law allows them to be utterly dependent on federal dollars.

If Congress required such operations to get more of their revenue from private sources then more institutions would be forced to produce higher-quality programs that students would be willing to pay for.

The rules proposed by the Obama administration would apply to career programs at public and private nonprofit and for-profit colleges, and they would require programs to meet two guidelines to remain eligible for aid. The estimated loan payment of a typical graduate could not exceed 20 percent of discretionary earnings after basic expenses, or 8 percent of total annual earnings, under those rules. And a program’s loan default rate for former students could not exceed 30 percent.

These rules are a good start. But a startling analysis released in the spring by the Institute for College Access and Success, a nonprofit research group, found that even some programs where defaults outnumbered diplomas would remain eligible for aid under the proposed rules.

The rules could be tightened by taking into account the repayment rates — the proportion of students paying down their loans — to keep schools from hiding impending defaults by letting students put off payments.

Beyond that, schools with programs that lose eligibility for government student aid should be required to pay back any loans that students have taken out and return Pell grants to the government. The Education Department needs broader authority from Congress to disqualify schools quickly when problems become evident. That may be the only way to get bad operators out of this business.

A version of this article appears in print on , on Page A24 of the New York edition with the headline: Lessons of a For-Profit College Collapse. Order Reprints | Today’s Paper | Subscribe